Investment funds for uninitiated persons

Investment funds

Investment funds invest the participants’ capital in appropriately selected financial instruments (e. g. shares, currencies, bonds). Thanks to the accumulation of significant capital, fund managers (Investment Fund Associations) carry out beneficial investments, which result in a multiplication of the trust.

The most popular type of funds is the so called fund. Open end investment funds, which can be divided into several main groups: open end investment funds.

Stocks funds are funds whose investment policy is to invest mainly in instruments with a higher investment risk (stock). The stock of stocks in the portfolio may amount to 100%, but usually does not exceed 90%. This type of funds is subject to very high investment risk. This type of fund may generate high returns during the period of stock market growth, but it may, however, result in a fluctuation in the value of fund participation units during the period of declines.

Bond funds are funds whose investment policy involves investing assets in medium-term and long-term debt instruments, mainly issued or guaranteed by the State Treasury.  A large part of the bond funds is invested in treasury bills. These funds have a low financial risk, but it should be borne in mind that such risk exists, as the prices of long-term bonds may fluctuate sharply – they increase in the event of interest rate falls and fall when interest rates go up.

Cash funds are funds which invest in:

a. Short-term debt securities or bank deposits with a maximum maturity of less than one year; and
b. debt instruments with variable interest rates and maturity dates longer than one year, provided that they have an interest rate risk not higher than in the case of debt instruments with maturity dates not exceeding one year.

These funds are characterized by a low investment risk and constitute an excellent form of investment in the period of the downturn on the equity market.

Hybrid funds are split into funds:

a. stable growth – stock of stocksin assets does not exceed 40%; and
b. Balanced – the stock in the assets is between 40% and 60%; and
c. asset allocation – share of stocks and fixed income securities in their assets may be in broad ranges, usually not narrower than 20%-80%.

There is a hypothesis that in the long run, hybrid funds can generate profits equal to or even higher than equity funds, since the latter are entirely dependent on stock indices. However, it should be remembered that hybrid funds have limited amortisation possibilities. In the case of significant losses on the share part of the portfolio, the chances that the remaining investments will be able to effectively catch up with the losses incurred on stocks are also decreasing.

Investment funds can be an excellent form of capital investment. Due to their diversity, they can be an interesting alternative to bank deposits. In the long term, the profits from the funds may well exceed profits from bank deposits.

How to invest in investment funds: